Drafting the S-1: Avoiding Common Pitfalls in the Registration Statement

Drafting a Registration Statement (Form S-1 or S-1) sometimes is deemed a low-priority task or is viewed as a “check the box” exercise. However, much time and effort by many departments are required to successfully complete and file an S-1 that ultimately is approved by the U.S. Securities and Exchange Commission (SEC). Without the SEC’s approval, no amount of planning will bring a company public. Pitfalls exist throughout the entire process. With careful preparation and guidance, along with the proper planning by a Project Management Office (PMO), the process will happen within the planned timeline and not become a gating item to closing the initial public offering (IPO).

Investors’ appetite for initial public offerings has been erratic over the last year despite a strong showing by U.S. equity markets. Some high-profile IPOs experienced a variety of issues that led to poor market debuts or post-IPO performance, temporarily dampening enthusiasm for new issues. However, while these disappointing IPOs may have attracted most headlines, other companies have fared well following their IPOs, including Annie’s, Bloomin’ Brands, LinkedIn, Workday and Zillow.

Another useful way of determining where the SEC may find fault is to review the history of amended S-1 forms.

Market conditions can change quickly these days. Accordingly, companies preparing for an IPO must be nimble and flexible in their timing. The process of drafting the Registration Statement and gaining subsequent clearance from the Securities and Exchange Commission is one of the more unpredictable aspects of IPO preparation. It is not a process to be taken lightly, as evidenced by the well-known difficulties encountered by Groupon, Zynga and Facebook following their IPOs. Groupon did not sufficiently clear its accounting methods with the SEC, while Zynga was not consistent with its accounting methods leading up to the IPO. Facebook, for its part, faced claims from investors that it did not consistently and clearly disclose its growth prospects immediately before the IPO. These missteps likely contributed to the decline of each company’s stock price from its initial IPO level.

The recently passed Jumpstart Our Business Startups Act has reduced the requirements for smaller emerging companies. But for companies with revenues of more than $1 billion, resolving SEC pre-clearance issues, creating multiple S-1 drafts and amendments, and responding to SEC comments can be time consuming — often taking several months. With a Project Management Office and a well-planned development process that thoroughly addresses all risks and issues with the SEC, a company can reduce unexpected delays with its IPO and avoid post-filing SEC issues, enabling the company to take advantage of changing market conditions on short notice.